Electronic trading platforms captured 44% of buy-side U.S. equities order flow in 2023, up from 42% in 2022, according to new data from Coalition Greenwich.
Approximately 37% of overall 2023 volume was executed through algorithms and/or smart order routers (an increase from 35%), while 7% was directly routed to crossing networks, flat year over year.
“Managers anticipate a continued upward trend, projecting algorithmic trading to reach 40% and crossing networks to increase to 8% within the next three years,” said Jesse Forster, Senior Analyst at Coalition Greenwich Market Structure & Technology and author of U.S. Equity Markets 2024: Trends and Opportunities.
Conversely, portfolio trading remains relatively stable, hovering around 12–13%, with little anticipated growth in the next three years, he added.
An even greater emphasis on electronic trading is evident among the highest commission-paying institutions in the marketplace.
Among these active institutions, 59% of flow by notional value is channeled through algorithms and 7% via crossing networks, according to the findings.
While electronic trading continues to gain traction, it still plays a secondary role to high-touch sales trading—at least for now, commented Forster.
As buy-side firms shift to more electronic execution, they are also cutting back on the number of brokers they use to trade U.S. equities overall.
Buy-side desks have modestly reduced their equity trading counterparty lists to an average of 31 brokers, down from 31.5 in 2022, according to the report.
“Sourcing natural liquidity remains the buy-side’s primary determinant in allocating a diminishing commission wallet, and desks are reducing their broker lists while concentrating flow to their top providers,” said Forster.
“There is one important exception: higher commission payers are expanding their lists to an average of 44.1, indicating a unique trend among top-tier institutions,” he said.
Buy-side managers last year used 55% of their equity commission spend to pay for research and advisory services last year, signaling a marginal increase from the past two years.
Hedge funds, trading more electronically at lower commission rates, led this move. Conversely, allocation to sales trading and agency execution services experienced a three-point decline.
According to the report, the primary criterion for selecting brokers for electronic trading remains the ease of use, reliability, and high-quality technical support of their platforms, garnering nearly three-quarters of buy-side preferences.
“The industry’s clear emphasis on these factors may point to a maturation in electronic trading, further signaling a departure of the “speed arms race” among brokers,” Forster said.
